Rating Rationale
August 22, 2022 | Mumbai
Cheema Boilers Limited
Ratings upgraded to 'CRISIL BBB+/Stable/CRISIL A2'
 
Rating Action
Total Bank Loan Facilities RatedRs.65.29 Crore
Long Term RatingCRISIL BBB+/Stable (Upgraded from 'CRISIL BBB/Stable')
Short Term RatingCRISIL A2 (Upgraded from 'CRISIL A3+')
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Cheema Boilers Limited (CBL) to 'CRISIL BBB+/Stable/CRISIL A2’ from 'CRISIL BBB/Stable/CRISIL A3+'.

 

The upgrade factors in the company’s stable business risk profile over the years, marked by sustained improvement in both revenue and operating profitability. On the back of demand revival and elevated input price in fy22, revenue grew by around 85% (over fy21); Going forward, revenue profile is expected to improve further backed by capacity additions and to resolve the storage constraint. Operating margin has been fluctuating due to susceptibility in raw material prices majorly steel as company is unable to fully transfer in the price variation, however, despite this fluctuation the company able to manage the operating margins within 6-7% in fiscal 2022. Improvement in revenue will support the operating profitability over the medium term.

 

The ratings factor in the healthy financial risk profile, aided by moderate reliance on external debt. Despite debt-funded capital expenditure (capex), the financial risk profile will remain healthy supported by steady accretion to reserve. Liquidity is adequate, backed by healthy net cash accrual against debt obligation, cushion in bank lines and unencumbered fixed deposit receipts, but partly constrained on account of large working capital requirement.

 

The ratings reflect the established position of the company in the boiler industry, supported by the extensive industry experience of the promoters and presence across domestic and international markets, and healthy financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices and large working capital requirement.

Key Rating Drivers & Detailed Description

Strengths:

  • Established market position: The three-decade-long experience of the promoters in manufacturing boilers, their understanding of market dynamics and healthy relationships with suppliers and customers will continue to support the business. The company has longstanding relationships with customers, which include established players from the public and private sectors. This has enabled steady growth in revenue to Rs 390 crore in fiscal 2022 from Rs 233 crore in fiscal 2019. Additionally, owing to space constraints and increasing orders, the company is planning to undertake capex in Mohali to add plants and efficiently manage demand, which will not only result in proximity with existing customers but also aid in onboarding new customers. Stabilisation of operations and steady ramp up in capacities, leading to sustained growth in revenue, will be closely monitored.

 

  • Healthy financial risk profile: Backed by steady accretion to reserve and no dividend payout, the capital structure was strong, as reflected in estimated networth and gearing of Rs 107 crore and 0.03 time as on March 31, 2022. Despite capital expenditure (capex) for capacity addition and to resolve space constraint and with expected accretion to reserve will support the capital structure over the medium term. Debt protection metrics were comfortable too on account of stable operating profitability. Though operating profitability declined in fy22 on account of steady increase in insulation cost amid rising prices, the same is expected to improve over the medium term. interest coverage and net cash accrual to total/adjusted?debt ratios of 24.12 times and 5.62 times, respectively, in fiscal 2022.

 

Weaknesses:

  • Susceptibility to volatility in raw material prices: Operating profitability is vulnerable to fluctuations in the prices of key raw materials and intense competition. The company enters into fixed price contracts with customers, resulting in limited bargaining power and inability to completely pass on price increase to customers. However, to hedge from increase in the price of key raw material, steel, the company has an order-backed arrangement. Resultantly, the operating margin was 6-7% over the past two fiscals and with 6.40% during fy22, down from 6.93% during fy21. Going forward, sustained increase in revenue along with stable operating profitability will be key rating sensitivity factors.

 

  • Working capital intensive operations: Operations are working capital intensive, as reflected in gross current assets of 160-180 days as on March 31, 2022, driven by receivables and inventory of 40-60 days and 60-80 days, respectively. However, the company did not report any bad debts in fiscal 2022. The inventory is expected to remain sizeable at 60-80 days as projects have long lead time of 2-6 months. Furthermore, the working capital cycle is supported by customer advances, which stand at 10-15% depending on forfeiture clause. If a counterparty defaults or backs out of delivery of boiler, the advance payment is forfeited. The working capital requirement will remain large over the medium term.

Liquidity: Adequate

Bank limit utilisation was low at 5.67% on average during the 12 months through June 2022. Cash accrual, expected at Rs 20-25 crore per annum, will sufficiently cover yearly term debt obligation of Rs 2-3 crore over the medium term. In addition, the surplus will cushion the liquidity of the company. Current ratio was healthy at 1.43 times as on March 31, 2022. Cash and bank balance was Rs 40-50 crore as on March 31, 2022. Low gearing and moderate networth support financial flexibility and cushion against adverse conditions or downturns in the business.

Outlook: Stable

CRISIL Ratings believes CBL will maintain its healthy financial risk profile over the medium term.

Rating Sensitivity Factors

Upward factors

  • Significant and sustained improvement in revenue alongside stable operating profitability, leading to net cash accrual of over Rs. 30 crore.
  • Efficient working capital management leading to lower reliance on bank lines.

 

Downward factors

  • Decline in revenue or profitability resulting in annual cash accrual of less than Rs 15 crore.
  • Stretched working capital cycle or sizeable debt-funded capex weakening the financial risk profile, especially liquidity

About the Company

CBL was incorporated in 1999 by Mr Harjinder Singh Cheema by acquiring the assets of Cheema Engineering Services Pvt Ltd (incorporated in 1990). The company has facilities in Kurali, Punjab. It supplies boilers as well as design, fabrication, installation and commissioning services. It also undertakes projects for capacity enhancement, upgrade of boilers and supply of boiler parts and accessories, such as air pollution control equipment, and fuel- and ash-handling systems.

Key Financial Indicators

As on/for the period ended March 31

Unit 

2022 (Provisional)

2021

Operating income

Rs crore

390.20

210.51

Reported profit after tax (PAT)

Rs crore

17.03

8.31

PAT margin

%

4.40

4.07

Adjusted debt / adjusted networth

Times

0.03

0.07

Interest coverage

Times

21.58

8.76

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s)

ISIN Name of
instrument		 Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs.Crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Cash Credit NA NA NA 23.3 NA CRISIL BBB+/Stable
NA Letter of credit & Bank Guarantee NA NA NA 32.5 NA CRISIL A2
NA Term Loan NA NA Mar-25 9.22 NA CRISIL BBB+/Stable
NA Proposed Long Term Bank Loan Facility NA NA NA 0.27 NA CRISIL BBB+/Stable
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 32.79 CRISIL BBB+/Stable   -- 31-05-21 CRISIL BBB/Stable 11-02-20 CRISIL BBB-/Stable   -- CRISIL BBB-/Stable
Non-Fund Based Facilities ST 32.5 CRISIL A2   -- 31-05-21 CRISIL A3+ 11-02-20 CRISIL A3   -- CRISIL A3
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 5.8 HDFC Bank Limited CRISIL BBB+/Stable
Cash Credit 17.5 State Bank of India CRISIL BBB+/Stable
Letter of credit & Bank Guarantee 10 HDFC Bank Limited CRISIL A2
Letter of credit & Bank Guarantee 22.5 State Bank of India CRISIL A2
Proposed Long Term Bank Loan Facility 0.27 Not Applicable CRISIL BBB+/Stable
Term Loan 0.72 HDFC Bank Limited CRISIL BBB+/Stable
Term Loan 8.5 Tata Capital Financial Services Limited CRISIL BBB+/Stable

This Annexure has been updated on 09-Feb-23 in line with the lender-wise facility details as on 19-Jan-23 received from the rated entity.

Criteria Details
Links to related criteria
CRISILs Bank Loan Ratings
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
Assessing Information Adequacy Risk

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